ASKiIMAN™
NEXUS / 2021 / GS1
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UPSC 2021: Nexus 01—10

Unearthing the structural logic of the paper. [Set A]

Question 01

Monetary Institutions

Consider the following statements:

  1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
  2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
  3. The Governor of the RBI draws his power from the RBI Act.

Which of the above statements are correct?

Official Verdict: (c) 1 and 3 only

The Core Concept: The RBI is a statutory body, not a constitutional one. The Governor is appointed by the Central Government (Statement 1) and draws all powers entirely from the RBI Act, 1934 (Statement 3). The trap lies in Statement 2: The power of the Central Government to issue directions to the RBI in the public interest comes from Section 7 of the RBI Act, not the Constitution of India.

Tethered to: REALM 129: Reserve Bank of India

CONSTITUTION RBI ACT Sec 7 GOV
EPF (>20 emp) Not ALL Hours/Overtime ✅ Bank Wage ✅

Question 02

Labor Economics

With reference to casual workers employed in India, consider the following statements:

  1. All casual workers are entitled for Employees Provident Fund coverage.
  2. All casual workers are entitled for regular working hours and overtime payment.
  3. The government can by a notification specify that an establishment or industry shall pay wages only through its bank account.

Which of the above statements are correct?

Official Verdict: (b) 2 and 3 only

The Core Concept: Extreme wording is key here. While the Supreme Court ruled casual workers *can* be entitled to EPF, the EPF Act legally only applies to establishments employing 20 or more persons. Therefore, not all casual workers are covered (Statement 1 is false). However, under the Minimum Wages Act, all workers (casual or formal) are entitled to regular working hours and overtime (2). The Payment of Wages Act explicitly allows the government to mandate digital/bank transfers for wages (3).

Tethered to: REALM 103: Informal Employment & Economic Security

Question 03

Macroeconomics

Which among the following steps is most likely to be taken at the time of an economic recession?

  • (a) Cut in tax rates accompanied by increase in interest rate
  • (b) Increase in expenditure on public projects
  • (c) Increase in tax rates accompanied by reduction of interest rate
  • (d) Reduction of expenditure on public projects

Official Verdict: (b) Increase in expenditure on public projects

The Core Concept: This is classic Keynesian economics. During a recession, private demand collapses. To stimulate the economy, the government must adopt an Expansionary Fiscal Policy—meaning they act as the spender of last resort. By increasing expenditure on public projects (building roads, dams), the government creates jobs, puts money in people's pockets, and kickstarts aggregate demand.

Tethered to: REALM 215: Economic Cycles

RECESSION ECONOMY Govt Public Works
COFFEE Price ↑ TEA Demand ↑ If Own Price ↓ Quantity Demanded ↑

Question 04

Microeconomics

Other things remaining unchanged, market demand for a good might increase if

  1. price of its substitute increases
  2. price of its complement increases
  3. the good is an inferior good and income of the consumers increases
  4. its price falls

Which of the above statements are correct?

Official Verdict: (a) 1 and 4 only

The Core Concept: Basic demand theory. 1: If coffee (substitute) gets expensive, people buy more tea (Demand increases). 2: If cars (complement) get expensive, people buy less petrol (Demand decreases). 3: For an inferior good, as people get richer, they buy less of it (shifting to normal goods). 4: If the price of the good itself falls, the quantity demanded increases (moving down the demand curve). Thus, 1 and 4 are correct.

Tethered to: REALM 01: Nature, Structure & Basic Features

Question 05

Banking Regulation

With reference to 'Urban Cooperative Banks' in India, consider the following statements:

  1. They are supervised and regulated by local boards set up by the State Governments.
  2. They can issue equity shares and preference shares.
  3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.

Which of the statements given above is/are correct?

Official Verdict: (b) 2 and 3 only

The Core Concept: UCBs historically suffered from "dual control." They are registered under State Cooperative Societies Acts, but their banking functions are strictly supervised and regulated by the RBI, not local State boards (making 1 false). Under RBI guidelines, they are allowed to raise capital by issuing equity and preference shares (2). They were officially brought under the BR Act 1949 via an amendment in 1966 (3).

Tethered to: REALM 130: Cooperative Banks

UCB STATE RBI (Since 1966) Equity Shares
YIELD US FED RBI INFLATION

Question 06

Financial Markets

Indian Government Bond Yields are influenced by which of the following?

  1. Actions of the United States Federal Reserve
  2. Actions of the Reserve Bank of India
  3. Inflation and short-term interest rates

Select the correct answer using the code given below.

Official Verdict: (d) 1, 2 and 3

The Core Concept: Bond yields represent the return an investor gets on a government bond. They are hyper-sensitive to macroeconomics. If the US Fed raises rates, foreign investors pull money out of India, dropping bond prices and spiking yields (1). If the RBI changes the Repo rate or does OMOs, it directly changes liquidity and yields (2). If Inflation rises, investors demand higher yields to protect their real returns (3). All variables are deeply intertwined.

Tethered to: REALM 122: Financial Markets

Question 07

External Sector

Consider the following:

  1. Foreign currency convertible bonds
  2. Foreign institutional investment with certain conditions
  3. Global depository receipts
  4. Non-resident external deposits

Which of the above can be included in Foreign Direct Investments?

Official Verdict: (a) 1, 2 and 3

The Core Concept: FDI represents lasting interest/equity in a domestic enterprise. FCCBs and GDRs are instruments that can be converted into equity shares of an Indian company, placing them under the FDI umbrella. Further, Arvind Mayaram Committee established that FII/FPI investment greater than 10% in a single company is reclassified as FDI ("certain conditions"). However, NRE deposits (4) are simply bank accounts held by NRIs; they are debt/deposits, entirely separate from equity FDI.

Tethered to: REALM 170: FDI in India

FCCB GDR FII (>10%) FDI NRE Deposit DEBT ❌
₹ ↓ Devaluation EXPORTS Cheaper for Foreigners

Question 08

Macroeconomics

The effect of devaluation of a currency is that it necessarily

  1. improves the competitiveness of the domestic exports in the foreign markets
  2. increases the foreign value of domestic currency
  3. improves the trade balance

Which of the above statements is/are correct?

Official Verdict: (a) 1 only

The Core Concept: When a country devalues its currency, its goods become cheaper for foreign buyers, directly improving export competitiveness (1 is true). It decreases (not increases) the foreign value of the domestic currency (2 is false). While devaluation might improve the trade balance over time (J-curve effect), it does not necessarily do so immediately, as imports become costlier and demand elasticities vary (3 is false).

Tethered to: REALM 175: Exchange Rate Determination

Question 09

Fiscal Policy

Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?

  • (a) Diversion of resources to the purchase of real estate and luxury housing
  • (b) Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
  • (c) Large donations to political parties and growth of regionalism
  • (d) Loss of revenue to the State Exchequer due to tax evasion

Official Verdict: (d)

The Core Concept: While (a), (b), and (c) are all valid negative societal and economic side-effects of a shadow economy, the fundamental, existential "worry to the Government of India" from a fiscal standpoint is the direct loss of tax revenue (d). Black money is simply income that has evaded taxation. Without this revenue, the government cannot fund public infrastructure, welfare, or service its debt.

Tethered to: REALM 85: Black Money

EXCHEQUER Tax Evasion BLACK MONEY Direct Revenue Loss
PRICES Printing New Money = Too much liquidity

Question 10

Deficit Financing

Which one of the following is likely to be the most inflationary in its effects?

  • (a) Repayment of public debt
  • (b) Borrowing from the public to finance a budget deficit
  • (c) Borrowing from the banks to finance a budget deficit
  • (d) Creation of new money to finance a budget deficit

Official Verdict: (d) Creation of new money...

The Core Concept: This is "Deficit Financing" via monetization. If the government borrows from the public or banks, it is merely transferring existing money from one pocket to another. But if the government literally prints new fiat currency (via the RBI) to pay its bills, the total money supply in the economy spikes massively without a corresponding increase in goods. "Too much money chasing too few goods" is the textbook recipe for severe, rampant inflation.

Tethered to: REALM 97: Deficit Financing